Scottish Government

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Dear Sir or Madam

STRATEGIC WASTE FUND SUPPORT FOR LONG TERM WASTE MANAGEMENT PROJECTS TO MEET EC LANDFILL DIRECTIVE 1999-31-EC

I am writing to invite bids from local authorities for funding from the Strategic Waste Fund ( SWF) for projects designed to reduce the amount of bio-degradable, municipal waste sent to landfill in line with the targets set in the EU Landfill Directive.

Submitted projects should be in line with the Best Practicable Environmental Option ( BPEO) as set out in the Area Waste Plan or as identified using SEPA's BPEO Review process. They should also complement and build on current and planned projects designed to increase the amount of municipal waste which is recycled or composted. The Executive intends that the funding will primarily be for projects to create and operate infrastructure required for the treatment of residual waste left after recyclate and compostable organic garden wastes have been extracted, although scope for integration and inclusion of other waste management services should also be considered when formulating proposals. Residual waste treatment could include, for example, mechanical biological treatment plants, energy from waste plants and smaller scale facilities such as "in vessel" composting units for the treatment of organic wastes.

Local authorities are strongly encouraged to consider joint bids where strategic review groups have been established to identify requirements in line with the BPEO. The expectation of the Executive is that, in many cases, it will only be possible to obtain value for money for larger scale infrastructure projects if these operate across local authority borders and, therefore, it expects such options to be given very careful consideration.

The Executive is looking for bids to be submitted, in the form of Strategic Outline Cases for funding, by 31 January 2006. Initial guidance on the submission of bids is attached as at Annex A together with more detailed guidance on production of Strategic Outline Cases at Annex B. Any comments on this guidance should be made to:

Tel: 0131-244 7660 e-mail: gordon.jackson@scotland.gsi.gov.uk

Yours sincerely

Richard Grant
Head of SEPA Sponsorship and Waste Division

ANNEX A

GUIDANCE FOR APPLICATIONS TO STRATEGIC WASTE FUND FOR LONG TERM WASTE MANAGEMENT PROJECTS TO MEET EC LANDFILL DIRECTIVE 1999-31-EC

1. Purpose

1.1 This purpose of this annex is to describe the process whereby bids are invited to the Strategic Waste Fund ( SWF) from Scottish local authorities to assist with delivery of medium to long-term waste treatment infrastructure to meet the targets outlined in the National Waste Plan and Landfill Directive. All Scottish local authorities are eligible to bid for support but funding for every project cannot be guaranteed. Funding decisions will be taken on a Scotland wide priority basis and will depend on the outcome to the spending review process in 2006. Given pressures on public spending it is inevitable that SWF awards will be constrained. Consequently, local authorities should bear this in mind when compiling Strategic Outline Cases for funding and make every effort to identify vfm solutions.

1.2 It is the Scottish Executive's aim to promote the Best Practicable Environmental Option in line with the principles of sustainable waste management practice. The substantive objective of this approach is to seek investment which is able to deliver needs over the medium to long-term and demonstrate visible improvement to infrastructure year on year.

1.3 A well-scoped project lays solid foundations and reduces the chance of difficulties arising later. It is essential to ensure that the project that emerges from the development process provides value for money i.e. it adequately addresses identified infrastructure needs, is affordable and deliverable. Proceeding to market without ensuring that these issues are addressed will, at best, result in a long and protracted procurement process that delivers poor value for money and, at worst, will result in failure of the procurement.

1.4 Support is only available for waste management projects that will contribute towards meeting EC Landfill Directive 1999-31- EC or the domestic recycling/composting targets.

2. Form and Content of Bids

2.1 Bids should be in the form of an Strategic Outline Case ( SOC). Further guidance on the expected minimum content and scope of SOCs is attached at Annex B.

2.2 Although the cost estimates provided will be approximate, authorities are expected to demonstrate that they have thoroughly considered the affordability of the project and value for money of the preferred procurement route.

3. Timescale for Bids

3.1 Due to the need to inform the consideration of resource requirements by the Executive during the Spending Review to be carried out in 2006, a deadline date of 31 January 2006 has been set for submission of bids. It is expected that further discussion and clarification will be required after this date, and ultimately the Executive expects to respond to each bid and to have made appropriate decisions by autumn/winter of 2006.

3.2 The Executive cannot guarantee to consider bids received after the deadline date of 31 January 2006

4. Best Practicable Environmental Option ( BPEO)

4.1 Any project submitted for funding must represent the BPEO. Any project that deviates from the BPEO identified in the Waste Strategy Area Plan must have gone through a BPEO appraisal process (as per SEPA's guidance available at: http://sepa.org.uk/pdf/nws/guidance/compliance_testing_socs.pdf) to justify why it is considered the same or better than the BPEO initially identified in the Area Waste Plan.

5. Joint Bids Between Local Authorities

5.1 In many cases, local authorities will be able to improve the value for money by submitting joint bids with neighbouring authorities. This can allow for economies of scale where larger infrastructure projects are required and facilitate the integration of the different facilities that may be required. Larger projects are more cost effective to tender for because the transaction costs are proportionately less and opportunities for innovation and rationalisation are greater

6. Landfill Costs and Non Municipal Solid Waste

6.1 Any operations resulting in the landfill of waste or dealing exclusively with non- MSW are not eligible for support. However, integrated waste management proposals which treat both MSW and non- MSW can be proposed provided that full cost recovery of non- MSW and commercial waste falling within the control of local authorities is secured and the non- MSW/commercial waste elements are funded outside of the SWF.

7. Grant Awards

7.1 SOCs will be used by the Scottish Executive to give an indicative award once the outcome of SR2006 is known. Final grant awards will be determined before the selection of the preferred bidder ( PPP projects) or the selection of the winning tender (non PPP projects). No adjustments in the award will be made after this stage. In all cases, grant will be based on the Department's assessment of the net cost of providing the relevant infrastructure (further guidance on this will be issued in due course). This means that SWF support for projects will not be provided at 100% of the contract cost and it will be a pre-requisite of eligibility for funding that local authority contributions to costs will be made.

7.2 In some cases decisions may be reached by the Executive on providing financial support through the SWF for certain aspects of bid proposals ( i.e. a sub-set or component of bundled project proposals). In such cases discussions will take place with the local authorities concerned prior to final decisions being reached.

7.3 Support will be paid in the year of commencement of the service payments under the initial contract and will continue over its term. The payments in the first and last financial years will be adjusted pro rata where the service will run for only part of those years.

7.4 The Scottish Executive reserves the right to rescind SWF support where a project fails to proceed as originally planned, and/or reduce payments if subsequent changes in a contract call into doubt the continuing validity of the original assumptions made in the calculation.

8. Assistance Towards Developing Business Cases

8.1 Where strategic clusters of local authorities require specialist consultancy advice and support to develop and produce business cases, financial assistance will be provided to cover 80% of the approved costs to Outline Business Case stage or £300k, whichever is the lesser. Proposals should be discussed with the Scottish Executive at an early stage and local authorities should seek approval from the Executive at the undernoted stages:

1. Proposed tender specification together with assessment methodology; and
2. Post assessment conclusions and recommendations.

8.2 Once preliminary agreement has been reached, and prior to the procurement process being concluded, formal application should be submitted to the Executive for financial support.

8.3 Any approval for funding support being provided will be subject to local authorities: (a) fully committing to the process, including the allocation of the necessary level of internal staff resources (b) agreeing to share any additional costs arising and (c) proceeding to production of an Outline Business Case in the event of approval being given by the Executive to proceed from the Strategic Outline Case stage.

8.4 Local authorities within strategic clusters should consider amongst themselves as to whether the local authority financial contribution should be equally apportioned or whether shares should be calculated on another basis (such as waste arisings).

9. Assessment Criteria

9.1 SOCs will be assessed against the following criteria and a judgement will be made about the overall relative value for money of the various bids. These will be used to inform decisions on funding projects.

• The cost per tonne of waste diverted from landfill
• The extent to which the project contributes to the landfill diversion targets for Scotland
• The compatibility of the proposed projects with the BPEO
• A satisfactory integration with existing awards from SWF and existing waste management services generally;
• Affordability i.e. the extent to which local authorities will be able to meet any funding gap from their own resources.
• Deliverability i.e. the realistic timescale for implementing the proposed projects.
• Risk Management - a clear identification of risks and how these will be managed.
• Evidence of support for the project within the local authority/authorities and satisfactory joint working arrangements.

9.2 SOCs may also be subject to a Gateway Review type process. Further information on this will be made available in due course but in the meantime local authorities can familiarise themselves with the process by referring to . http://www.ogc.gov.uk/index.asp?id=377 .

10. Projects proceeding in advance of this process

11.1 The Scottish Executive has identified that there is a potential gap in 2010 between the amount of BMW that needs to be diverted to meet the Landfill Directive target in that year and what will be delivered by the projects funded thus far. In light of this Scottish Ministers have agreed to deal with three procurements in the central belt in advance of decisions on the remainder of local authorities that follow. The three projects concerned are: Edinburgh, Lothians and Borders; North/South Lanarkshire; and the Glasgow/East Renfrewshire. This approach will depend on emerging proposals from these clusters of local authorities meeting the success criteria detailed at paragraph 9 above; the resources made available to the SWF; and Ministerial approval being secured. All other projects will be considered equally and concurrently.

11. Further Information

11.1 Unless notified otherwise 5 paper copies of the SOC together with an electronic copy should be submitted to Gordon Jackson at the following address by close of business on 31 January 2006.

Email: Gordon.jackson@scotland.gsi.gov.uk
Telephone 0131 244 7660

11.2 Any further enquiries should be made to Gordon Jackson at the address above.

Scottish Executive
June 2005

ANNEX B

Guidance on Production of a Strategic Outline Case for Funding

1 Overview

1.1 This guidance note provides a framework for LAs that wish to apply for financial support from the Strategic Waste Fund ( SWF) towards procurement of waste management infrastructure designed to treat residual municipal waste and divert biodegradable municipal waste from landfill (phase 2 infrastructure).

1.2 SWF support for Phase 2 infrastructure can be provided for projects procured through capital grants as well as lease/loan charge or PPP support. However, due to the need to transfer risk to parties best equipped to manage risks it is envisaged that PPP will feature prominently in procurement of phase 2 infrastructure.

1.3 Irrespective of whether proposals involve procurement through PPP or the traditional route, the Executive advocates a structured and systematic approach to the development of a business case.

1.4 The Business Case is an essential document for project success. Within the context of the Landfill Directive BMW targets, the Business Case provides justification for the procurement in terms of its alignment with the National Waste Plan objectives and provision of financial support from the Strategic Waste Fund. It also provides a robust basis for managing the delivery of the project on time, within budget and to agreed quality standards.

1.5 The Business Case is an evolving document throughout the procurement. It starts with an Outline Business Case, the approval of which should be obtained before procurement can be launched and ends up as a Full Business Case with validation of previous information obtained. The availability of financial support from the SWF is contingent on ministerial approval on the Outline Business Case ( OBC) and the Full Business Case ( FBC).

1.6 The undernoted considerations are central to each stage of the process:

1. Strategic Need - What are you trying to achieve and why? What are the needs and priorities? Is the procurement scope right?
2. Option identification and appraisal - Have all of the viable options been explored, including innovation and/or joint working with other local authorities? How well does each option meet the needs and priorities? Do these confirm with the Area Waste Plan and the BPEO? Do any new options require a BPEO assessment to be carried out? What efficiencies can be expected from each option in respect of the overall waste management services provision?
3. Value-for-money - What is the best delivery route in value for money terms? What are the key vfm determinants and can the proposed project scope deliver against these? Is there sufficient evidence on market capacity in support of the procurement?
4. Affordability - Are there sufficient budgets available to contribute towards elements of the procurement that are ineligible for SWF support? If not, can the scope be reduced or delivery extended over a longer period of time or can funding be sought from other sources.
5. Achievability - Can this project be achieved with the local authority's current capability and resource capacity? Does the authority have access to the necessary skills, knowledge and expertise required? Is the project scope deliverable? Is the project bankable ie is the treatment of risk acceptable to the market and does it represent good vfm? Where are the risks to delivery, what is the magnitude of these risks and who is best placed to manage the risks? Can the project be made attractive to a wide supplier market?

1.7 It is important to note that the scope and content of each stage from production of an Outline Business Case and Final Business Case remains the same. It is merely the degree of comprehensiveness that changes.

1.8 Production of a full Outline Business Case is a timely and costly process involving extensive use of external advisers. It is likely that the total value of applications for SWF grants to support procurement of waste management infrastructure will exceed the amount Scottish Executive has available to allocate. It would be a wasteful exercise for an Authority to produce an OBC when there is a reasonable chance that it will not gain support and an allocation of the financial support available.

1.9 To avoid this situation, adoption of a two stage application process is recommended: A Strategic Outline Case ( SOC) followed by, for successful applicants, a full OBC submission

2 The Strategic Outline Case

2.1 At the Strategic Outline Case stage the Authority and Scottish Executive will concentrate on the ability of the project to meet policy criteria and deliver waste targets in timely manner. Those projects that score highest against the Scottish Executive evaluation criteria in the SOC assessment will receive a provisional allocation of financial support and the approval to produce an OBC within a defined time frame.

2.2 It is imperative that decisions on the procurement of any infrastructure are based upon a robust strategic and financial analysis of the options available. The Strategic Outline Case ( SOC) should provide clear justification to the Executive that there is a sound business case for proceeding with the chosen project option(s) and make it clear how it is intended to take the project forward. Initial approval should not be taken as a definite commitment to provide financial support but rather the recognition that there is a viable project to be worked up to an OBC.

2.3 A key stage in the process of developing a SOC is the identification of criteria for decision making, including the strategic context and business need for the waste treatment infrastructure, the options considered, applicability to the BPEO, the indicative costs, and importantly, the deliverability of the project. However, although every effort should be made to obtain accurate capital and operating cost estimates of the waste treatment infrastructure, detailed financial modelling including shadow bidder financial analysis ( e.g. Unitary Charge) and assessment of inter LA sub level payment mechanisms, will not be required at the SOC stage. Detailed financial appraisal and modelling will only be required once approval in principle has been granted to proceed to the Outline Business Case.

2.4 It should be noted that the Executive will use the cost information detailed in the SOCs to inform the spending review process which commences in 2006.

2.5 The business analysis should be undertaken at an early stage in the proposed procurement and this should be informed by the options appraisal process. The options appraisal will need to identify that there is a demonstrable requirement to do more than continue the status quo, and justify that there is a sound case for investment.

2.6 The SOC should give consideration to the proposed procurement method even though a full value-for-money analysis is not appropriate at this stage. The reasons for the choice of procurement method should be fully documented. In general PPPs should be considered when the project incorporates a number of the following characteristics:-

1. A major capital investment programme, requiring effective management of risks associated with construction and delivery;
2. The private sector has the expertise to deliver and there is a good reason to think it will offer vfm;
3. The structure of the service is appropriate, allowing the public sector to define its needs as service outputs;
4. The nature of the assets and services identified are capable of being costed on a whole-of-life, long term basis;
5. The value of the project is sufficiently large to ensure that procurement costs are not disproportionate;
6. The technology and other aspects of the sector are stable, and not susceptible to fast paced change;
7. Planning horizons are long term, with assets intended to be used over long periods into the future; and
8. There are robust incentives on the private sector to perform.

2.7 Business analysis and investment appraisal involves the analysis of a wide range of data, judgements and assumptions, all of which must be adequately evidenced. The aim of the SOC should be to support and justify the case for investment, and the most appropriate means of delivering the project. The options appraisal exercise should involve an assessment of the realistic possibilities and not just a list of impractical proposals.

2.8 The prime purpose of the SOC is to justify the scope of the project and choice of procurement method, and to provide the Executive with the relevant project information to enable approval in principle to be granted to proceed to the next stage. Project approval in principle will necessarily depend upon the SOC clearly demonstrating that the preferred option best meets the BPEO. In the event of the Executive granting approval in principle to progress to the next stage, the procuring authorities should then proceed to preparation of a full Outline Business Case stage. This will involve comprehensive financial modelling, value for money assessment and affordability analyses and appraisal.

2.9 The SOC establishes the initial feasibility of a suitable procurement route for the project, and sets the key parameters and milestones for managing and tracking progress, and for taking a project forward in a way that focuses on achieving the objectives and outputs required.

3 Template for Strategic Outline Case

3.1 This document should provide enough detail to support an informed decision by the Executive on whether agreement in principle can be given to proceed to development of an Outline Business Case ( OBC) or whether the project scope should be revisited. It should include an options appraisal of the options for meeting the authority's objectives together with an initial view of the costs, benefits and risks. This is a key document for business justification.

3.2 The information set out below should be used as a starting point for local authorities developing Strategic Outline Cases. The information content is presented here for convenience as 6 key aspects:

1. project summary
2. strategic need;
3. options appraisal;
4. achievability;
5. financial support requirement; and
6. commercial aspects.

3.3 Summary of Proposal: This should set out a summary of the key conclusions and recommendations arising from development of the SOC and an analysis of the next steps required for taking the project forward. It should also include a statement of support and commitment from the LAs involved in the project as well as confirmation that the proposal is in alignment with the BPEO. Where proposals vary from the content of the AWPSEPAs BPEO Review Process will require to be followed. Advice on this will be provided to local authorities by the Waste Strategy Area Co-ordinator as required.

The summary should also include:

• An overview of proposal showing how the scheme meets Scottish Executive selection criteria.
• Details of how the project meets Scottish Executive's policy priorities.
• The estimated level of financial support required to support the project and other sources of potential funding.
• How the project may contribute to the requirements of neighbouring authorities
• Details of project deliverability such as availability of sites and/or planning, compliance with the Local Waste Plan and other regional land use plans.
• The extent of stakeholder support.
• Details of resources - personnel and financial - that the authority intends to commit to the project including any experience of delivering either PFI or large scale capital projects.
• Contact details.

3.4 Strategic Need: This aspect of the SOC explains how the scope of the proposed project fits within the statutory duties of the local authority(ies) as waste collection and disposal authority and explains why there is a compelling case for change, in terms of the existing and future operational needs.

3.4.1 Minimum content needed for this section includes:

1. Outline the current service delivery arrangements, contracts with service providers, and year on year waste flows taking account of the effect of phase 1 infrastructure.
2. Description of the business need and the contribution this will make towards delivery of the BPEO.
3. Identification and discussion of minimum, desirable and optional scope having regard to phasing and need.
4. Summary of main constraints such as existing contractual commitments.
5. Outline the internal and external factors upon which the successful delivery of this project are dependent, such as other projects and programmes already underway.
6. Outline high level strategic and operational benefits
7. Outline the key operational risks associated with the provision of these services and the proposed treatment of these risks.
8. Outline of main business risks such as the lack of internal skills to implement the required project; and external environmental risks such as changes in the supplier marketplace.
9. Identification of critical success factors for the project and how success will be measured.
10. Details of stakeholder involvement including local authority partners together with any potential conflicts or hurdles.

3.5 Options appraisal: This aspect of the business case should be undertaken in accordance with the principles of HM Treasury's Green Book and should document the range of options which have been considered. It should aim to arrive at the optimum balance of cost, benefit and risk. This aspect should be informed through the option appraisal process being undertaken as part of the Strategic Reviews underway throughout Scotland.

3.5.1 Minimum content needed for this section includes:

1. Details of options identified for analysis. Each viable option should be subjected to SWOT analysis against contribution to key objectives and critical success factors. It should include a do minimum option together with at least two but no more than seven options in total.
2. Description of the opportunities for innovative approaches such as a new way of providing a particular service or exploiting new ways of saving costs for provision of the necessary waste treatment infrastructure.
3. Outline of the opportunities for collaboration with others including where private sector partners can share costs. If no opportunities exist and/or there are essential business reasons for avoiding innovation and/or collaboration with others the reasons should be provided.
4. Details of who will deliver the project. Options will range from in-house delivery to degrees of partnership with the private sector and/or with other local authorities. Each option should be described and advantages/disadvantages discussed. The preferred approach should be justified.
5. Examination of implementation options including phasing. The options for the pace at which the project could be implemented, in terms of the timescales and degree of change required should be identified and discussed.
6. Detailed options appraisal providing an explanation of the general approach taken to the calculation of costs and benefits, together with overview of the key findings that result from each of the shortlisted options. Include details of 'soft' benefits, that is benefits that do not have a direct financial value, such as improved quality of service.
7. Initial risk quantification and analysis. For example, what would be the effect of delayed planning permission for a new waste management facility? What would be the impact if a service came on stream much sooner or later than expected?
8. Benefits appraisal: This should provide details on how much waste is being diverted from landfill and what usage is made of the waste. This information should be used to calculate the cost per tonne of waste diverted. Where ancillary benefits are identified these should be included with a rationale for their existence.
9. Preferred option: Summarise the findings, sensitivity analysis and overall ranking.

3.6 Commercial aspects (the financial case): This section should outline the proposed procurement mechanism together with justification for the intended approach.

3.6.1 Minimum content required for this section includes:

1. Description of the preferred option (and in case not all aspects are to be procured in one procurement, which parts are to be procured immediately or relate to the financial support required)
2. Risk allocation and transfer: Summary assessment of how the types of risk might be apportioned or shared, with risks allocated to the party best placed to manage them subject to achieving value for money.

3.7 Financial support requirement (the financial case): Assessment of available funding and estimate of financial support required. Minimum content for this section includes projected year on year capital and operating costs taking account of potential savings and local authority contributions.

3.7.1 Questions that must be addressed include: Can the required level of local authority contribution be obtained to deliver the whole project? If not, can the scope be reduced or delivered over a longer period of time?

3.8 Achievability (the project management case): This section addresses the 'achievability' aspects of the project. Its primary purpose is to set out the project organisation and actions which will be undertaken to support the achievement of intended outcomes including procurement activity and market testing of service level providers.

3.8.1 Minimum content for this section includes:

1. Evidence of similar projects: If possible, provide evidence of similar projects that have been successful, to support the recommended project approach. If no similar projects are available for comparison, outline the basis of assumptions for delivery of this project.
2. Project roles: Set out the key roles detailing who and how the project will be taken forward. Where more than one local authority is involved high level details of how project management and governance will be dealt with should be provided. Confirmation should also be provided as to whether the project team have appropriate skills and experience and/or have access to specialist expertise to supplement skills gaps if required.
3. Reporting structure showing the relationships between the Project Board and Project Team an indicative schedule of key decisions and where these need to be taken to the full Council.
4. Procurement strategy: Set out indicative timetable and justification for the proposed approach.
5. Contract management: summarise outline arrangements for contract management. Confirm arrangements for continuity between those involved in developing the contract and those who will subsequently manage it.
6. Risk management strategy: Summarise outline arrangements for risk management including technology and obsolescence risks and end-use markets.
7. Benefits realisation plan: Summarise outline arrangements for benefits management.